Hourly Employee vs Independent Contractor

Hello, and welcome back to The Brown Parachute Club. This week I thought I would go into greater detail about the job classifications that are out there. If you have been unemployed for a while, you may want to look into becoming an Independent Contractor as a way of bringing in some extra income. Either on your own, or working WITH, but not FOR a company like Uber or Lyft. I’ll illustrate the differences between being an Hourly Employee and an Independent Contractor. Many of the Side Hustle and Work From Home jobs I have featured on this blog are Independent Contractor positions.

First a little background. As you already know, back in 2008 the country went through a major financial crisis. Many banks, insurance companies, and brokerage houses either went out of business or were bailed out by the U. S. Taxpayer. Losing millions of their client’s dollars in the process. Names like Lehman Brothers, Bear Stearns, Goldman Sachs, and AIG were all over the news. To learn more about this event, watch the film, The Big Short. That movie scared the crap out of me!

In response to this financial crisis, many companies took advantage of an opportunity they had been waiting for. “How do we decrease the size of our workforce, without appearing weak to our stockholders, or the business community at large?” The Crash of 2008 was a gift to many companies who had been wanting to cut back their staff for years. However, if they resorted to layoffs, it would make the company look financially unstable.

I heard about this scheme from an article in the Huffington Post by James Altucher. In his article, 10 Reasons You Have to Quit Your Job in 2014, he explained how this plot was hatched. But more importantly, he explains why the old business model no longer works and why you should consider striking out on your own. He was talking about becoming an Independent Contractor or starting up your own business.

There are definitely Pros and Cons for each classification.

Pay: If you were an Hourly Employee at your previous job, more than likely you were paid every two weeks. Because of sick days and vacation days, many times you were paid for NOT working. As an Independent Contractor, you are paid for the job or project you have agreed to perform for a company or individual. Period. Your pay is based on the quote you gave for the job. Think about a plumber giving you an estimate to fix the leaky faucet in your tub.

Hours: A full-time Hourly Employee can expect to work a minimum of 40 hours per week. If part-time, then those hours vary, but are usually 30 hours or less. An Independent Contractor (IC) puts in as many hours as needed to finish the job. Since his pay is not hourly, it behooves him to do the job right and finish as quickly as possible. Then he can move onto the next job.

Benefits: Hourly Employees can expect to receive a host of benefits from their employer. These range from health care to dental care and vision care, etc. An IC must take care of these expenses on his or her own. With the soaring cost of health care, this is a major consideration. However, there may be group plans that ICs can join that will hopefully bring down this cost.

Retirement: As an Hourly Employee, you may have a fully-funded, partially-funded, or employee-funded retirement plan provided by the company. In addition to that, you pay into FICA (Social Security and Medicare), which is also a source of retirement funds. As an IC, you are on your own for your retirement funding and you still have to pay into FICA.

Flexibility: This is one area where an IC has it made over an Hourly Employee. As an IC, you set your own hours and work when you want. In the plumber example I gave earlier, if the plumber is an IC and not an employee for a plumbing company, he determines his own work hours. As an Hourly Employee, your hours are set by the employer and you’d better be to work on time!

Tax Considerations: As an Hourly Employee, all of your taxes and deductions are withheld by your company and forwarded onto the recipients for you. When you’re an IC, you are on your own for taking care of your taxes and any other deductions. On the bright side, when you get paid, you get a check for 100% of the job quote. Not like the net income check that an Hourly Employee gets. If you are working with a company like Uber or Lyft, they will provide you with a Form 1099 instead of a Form W-2. That form will detail the income you earned with them for the previous tax year.

Freedom: This is when being an IC really beats being an Hourly Employee. The only problem is that your time off is unpaid. However, when you need a day off, take it! When you want to go on vacation, go! When the weather is crappy, stay home! The Hourly Employee doesn’t have that luxury. Need a day off? Clear it with the boss. Want to go on vacation? Sure, if someone is there to cover for you. Feel like crap and just can’t make it into the office? No problem, if you have any sick days left. You get the idea.

Security: The Hourly Employee has the satisfaction of knowing that every two weeks, like clockwork, he is going to be paid for his hours worked (or not worked if sick or on vacation). The IC gets paid only for the work that was done. No work, no pay! After many years as an Hourly Employee, this is the toughest thing to get used to as an IC.

I guess for me, what it all comes down to is the old formula: Time vs Money. If you don’t have a job at all, you have plenty of Time, but no Money. If you are an Hourly Employee, you are giving up a substantial amount of Time for Money. However, as an IC, if done correctly, you can have the perfect balance of Time AND Money! That is the elusive Golden Ticket that all ICs are looking for.

I hope this article has helped to clear up any misconceptions about the difference between these two types of work classifications. In preparing this blog, articles from Salary.com and BankRate were very helpful in explaining these differences.

DISCLAIMER: As usual, before making any financial decisions based on the information I have detailed above, be sure to check with your tax professional and / or retirement planning specialist for more information.

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